Viacom hurt by Freston deal; focus on TV prod'n

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NEW YORK -- Viacom Inc. reported a lower third-quarter profit Thursday because of a charge for the severance package that former CEO Tom Freston received after his recent ouster as well as weaker film results compared with a strong year-ago period.

New CEO Philippe Dauman spent most of his first earnings conference call further detailing his vision for the company and outlining new initiatives for Viacom's digital transition, which he called his top priority.

Dauman said that in the coming weeks, Viacom will unveil the creation of "multiplatform networks" targeting specific adult demographics with content offered via broadband, mobile and video-on-demand. He also said there is "a good chance" that Viacom will generate $500 million in digital revenue -- including online, video gaming, mobile and other sales -- as early as 2007, a year ahead of the company's previous target.

In addition, his team is working to boost the profitability of the firm's international cable networks business, the CEO said. For example, Viacom is looking at striking content-licensing deals in its smaller markets and recently has done so in Taiwan, Indonesia and Turkey, Dauman said. In bigger markets, the firm is moving to deepen its presence by taking full control of any jointly operated businesses, as it recently did in Japan.

Dauman also said that Paramount management, given its TV expertise, is looking at adding TV production back into the mix in a "smart, low-cost way" with a focus on high returns. He didn't provide further details.

But he did laud Paramount management, led by Brad Grey, with re-energizing the studio, saying that he is "very pleased with the significant progress" of the operating and the acceleration of its turnaround via the acquisition of DreamWorks.

In a personnel change, Viacom said Thursday that Michael Dolan will step down as chief financial officer at year's end -- a move many Wall Street observers had expected since Dauman replaced Freston in September. Senior vp and chief administrative officer Thomas Dooley, Dauman's right hand, will take on the added chief financial officer duties.

Viacom posted a third-quarter profit from continuing operations of $356.3 million, down from $449.8 million in the year-ago period. The figure for the latest period included $62 million in one-time compensation charges related to the Freston package and a $29.1 million tax benefit. Revenue rose 7% to $2.66 billion, slightly exceeding the average analyst estimate.

"The primary driver of upside was cable networks, where both revenue and profits exceeded expectations," Bear Stearns analyst Spencer Wang said.

Viacom reaffirmed its full-year 2006 outlook, which calls for a double-digit percentage increase in revenue and operating income. It also expects earnings per share of $1.95-$2 from continuing operations, excluding items.

At Viacom's cable network unit, revenue rose 10% to $1.84 billion, with operating profit up 14% to $777.7 million. The improvements were driven by a 7% advertising sales increase, which included a 7% U.S. ad gain, which disappointed some.

"While scatter pricing is improving versus the upfront ... the magnitude of the improvement to date has not been as great as we expected," said Wang, who had projected a 9.5% gain. "We think this is due to slower-than-expected 3% (ad rate) growth versus our 5% forecast."

Sanders Morris Harris analyst David Miller said ad growth at the cable networks unit has been slowing, "with third-quarter international advertising revenues still displaying weakness in the German and U.K. markets." However, he lauded management for controlling costs at the division to bring in stellar margins.

Asked about the fourth-quarter ad-scatter market, Dauman said growth is looking comparable with the third quarter.

Meanwhile, digital ad sales were up 73% in the latest period and should continue to be in the high-double-digit percentage range in the foreseeable future, he said.

Viacom's film division reported an operating loss of $6.7 million, compared with a year-earlier profit of $108.2 million. Revenue edged up 1% to $856.5 million.

Boxoffice results for third-quarter releases like "World Trade Center" had a difficult comparison with last year's "War of the Worlds."

Dauman said he is bullish for such upcoming releases as "Charlotte's Web," "Dreamgirls" and "Transformers," calling the 2007 slate stronger than this year's output.

He also lauded "Babel," which expands wide today, as a model for low-budget, star-power-driven films and said the studio will start releasing movies under the banner of Viacom's BET network, with brass also exploring possibilities for Comedy Central and CMT.

"Considering the short time that Philippe Dauman has been in place as CEO, I am truly impressed with our solid third-quarter results," Viacom chairman and controlling shareholder Sumner Redstone said Thursday. During the call, he lauded Dauman for his "rigor and urgency," saying he is "extremely enthusiastic" about the company's outlook.

Wall Street generally seemed to give Dauman good marks for his strategies, though some said they would have preferred to get even more detailed reassurance for the health of the cable network ad business.

"Dauman crafted a credible outline of his intent to lead the company into the digital age," Barrington Research analyst James Goss said.

Viacom's Class B shares closed down 3.3% at $38.37. They have traded from $32.42-$44.95 during the past year.
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